Briefly explain the concept and operation of a fixed exchange rate. How can the government keep the value of the exchange rate within the fix?
What will be an ideal response?
POSSIBLE RESPONSE: A fixed exchange rate is the rate that is officially set by the government or monetary authority. With a fixed exchange rate, a small deviation from the fixed par or central value, called a band, may be permitted around that value. The country's monetary authority must determine what to fix the value of currency to, how to defend the fixed value of its currency against market forces, and when to change the value of its currency. Historically a country might fix the value of its currency to a precious metal such as gold or silver. A country could also tie their currency to another currency or a weighted average basket of currencies. To ensure that the currency's value remains fixed or within the predetermined band, the monetary authority under a fixed-currency regime can defend the fixed rate value by one or some combination of the following actions:
1. Buy or sell foreign currency in exchange for domestic currency in the foreign exchange market
2. Impose exchange controls to restrict supply and/or demand of the domestic currency in the foreign exchange market
3. Alter domestic interest rates to influence short-term capital flows
4. Adjust the country's entire macroeconomic position through monetary and fiscal policies that can alter supply and demand conditions in the foreign exchange market
At some time the government may need to determine when and how to change the fixed rate. Disequilibrium in the country's international position may require that the government adjust or abandon the fixed value.
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A) 3,000; $625 B) 6,000; $400 C) 3,000; $550 D) 4,000; $550 E) 4,000; $625
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As disposable income increases, _____
a. consumption and saving both increase b. consumption increases and saving decreases c. consumption and saving both decrease d. consumption decreases but saving increases e. saving increases, but we cannot predict what happens to consumption
Suppose that you take $500 from under your mattress and deposit it into your checking account. Assuming a required reserve ratio of 10%, what is the largest amount by which the money supply can increase as a result of your action
What will be an ideal response?